Europe's new privacy directives have yet to impact operations at major internet platforms

The big fact of our media life has become the big fact of our political life.

I covered its beginnings two decades ago. Adtech uses cookies to track users and deliver ads based on who you are, not what you happen to be looking at.

But Europe’s General Data Protection Regulation is trying to control this practice, which critics say destroys user privacy. So far investors are skeptical GDPR will do anything. They’re bidding up Adtech leaders like Alphabet Inc. (NASDAQ:GOOGL, NASDAQ:GOOG), up about 5% in the last month, and Facebook Inc. (NASDAQ:FB), up about 10%.

Playing With Fire

Doc Searls, a longtime tech analyst, recently wrote a blog for Harvard saying that the GDPR is specifically focused against Adtech, which he argues is a very good thing.

He wrote that Adtech undermines brands, that it’s a vector for malware and that it gives fake news and tribalism a business model while killing the model for real news. It’s more akin to spam than direct marketing — and just as inefficient.

Or is it? The largest Adtech company, by market cap, is Criteo SA (ADR) (NASDAQ:CRTO), a French outfit that does retargeting, serving ads to people who have already expressed interest in the product category by visiting a vendor.

The most effective Adtech technique is to aim at people who have previously signaled their interest in the product or service you’re selling. That’s what publishers do, they aggregate people based on their interests, their industry, or location, then sell access to those eyeballs.

What Adtech did was destroy the key to making that work — a premium price.

More Google, Less Facebook

Searls believes that Google will adapt over time to the new rules, and the latest iteration of Google News shows how. While Google News has no ads, it can track which stories users choose to click on, demonstrating their interest for companies like Criteo. It’s probably no coincidence that, in the latest Google redesign, Google News has gotten bigger while Google Finance, which is focused on investment decisions, has gotten smaller.

Facebook may have more problems. It is pushing users to quickly consent to its own rules for using its sites, and it’s being sued, along with Google, by the same group that won a 2015 ruling saying data sharing agreements between the U.S. and Europe violated European law.

Facebook faces more danger from GDPR than Google does for the reason I cited before the Facebook “scandal” broke. Facebook’s business model is almost totally dependent on Adtech. The company has skated on the initial scandal, but whether it can continue to defy politicians who now see it as a threat to their business model is a risk that did not exist in the stock before this year.

The Bottom Line

The GDPR is designed to favor publishers over platforms, but the market is assuming that platforms control so much of the advertising board that the effort is bound to fail.

Bulls are sure the whole effort will backfire. Publishers lack the financial wherewithal to do everything the GDPR demands they do — namely, to not track people unless they take responsibility for that data.

Investors should be aware of the threat the GDPR poses to internet business models, but it’s not yet time to panic.